Putting defined contribution funds on trial
A cynic might report the move from a Defined Benefit (DB) to Defined Contribution (DC) pension fund environment as a victory for employers. In record time South Africa’s large corporates shifted the risk of pension provision from their balance sheets on t
Kobus Hanekom, Head of Strategy, Governance and Compliance at Simeka Consultants and Actuaries tackled this tough topic at the Sanlam Multi Manager International retirement conference, held in Johannesburg on 17 August 2012. The first question he posed to the audience of Trustees and Principal Officers: “How efficient is your fund? And does it give members the inside track to a dignified retirement?” He said that the industry ideal was a group retirement fund that offered members an opportunity to invest – generate efficient returns – and receive the maximum outcome by way of an annuity income upon retirement. Instead the focus is on fund rules and governance... “Do you focus on doing the right thing or merely on doing what is required in terms of the legislation,” he asked.
Two sides to the retirement debate
South Africa’s move to DC funds coincided with the political transformation of the early 1990s. The DC concept was “sold” to employees on the basis of greater transparency and increased member choice. It took National Treasury more than two decades to weigh in with an assessment of the impact of these changes on the national retirement framework. Their retirement reform discussion paper, released in 2004, concluded that South Africans were ill prepared for retirement due to inadequate provisions. They single out two issues that need to be addressed.
They observed that retirement savers failed to preserve the capital in their pension funds and that costs in the retirement provisioning space were simply too high. Neither of these issues can be addressed by the Board of Trustees of an individual pension fund. Most industry commentators believe that mandatory preservation of accumulated retirement savings should be decreed by government by way of legislation. Costs cannot be addressed at fund level either. “During our tenure as Trustees on a Board of Trustees we invest members’ funds to incur the minimum fees possible – if there is a problem with costs then it must be structural,” says Hanekom.
It is clear that the retirement fund industry and National Treasury view South Africa’s dismal retirement provisioning situation differently. “National Treasury looks at the outcome for the domestic consumer by considering the actual pension paid during retirement,” says Hanekom. In contrast the industry (and particularly the Trustees of a pension fund) measure their performance based on whether or not they comply with all the fund rules and meet minimum standards of governance. “For as long as we do this we will not be getting to the kind or solution that National Treasury wants the industry to achieve,” he says. “It is no longer possible for Trustees to only concern themselves with narrow compliance to the fund rules”.
Addressing member behaviour
A better understanding of member behaviour should inform the approach industry stakeholders adopt in addressing current savings shortcomings. Global surveys of pension fund members confirm that they are apathetic, suffer from inertia, lack understanding of their investments and act with reckless conservatism. Left to their own devices pension fund members tend to destroy rather than create value. Younger investors tend to be too cautiously invested while the opposite holds for members nearing retirement, for example.
Hanekom believes that the solution to the many DC fund challenges is to accept member apathy and adapt the pension fund benefit structure and communication processes. “Unless you give members the structure and support they require they are unlikely to arrive at a dignified retirement,” he says. He also dismisses National Treasury’s premise that a shift from “light touch” to more intrusive regulation and supervision is required: “We need a scalpel to do some fine tuning rather than a bigger club to bash the wrongdoers. It is not as if there is insufficient regulation or that service providers are not doing a good job. Rather, the problem is to get members to pay attention”.
Aside from improved member communication the Principal Officers and Trustees of pension funds must realise that there are crucial retirement disciplines that are not contained in the fund rules. The regulator should consider this fact too. Issues such as leakage, cost controls, fund efficiencies and the continual assessment of whether the fund is reaching its objectives have to be top of mind despite not appearing in the rules! It is time for someone – possibly the employer – to take responsibility for these neglected issues.
What makes a good pension fund?
There are too many variables to define the perfect pension fund solution. Actuarial studies suggest that a 13% contribution of gross salary, invested over 35-years and achieving returns of CPI plus 7% should ensure a replacement ratio of 70% to 75%. Pension fund must consider such an objective to deliver the dignified retirements National Treasury desires. “We should talk about a target and work towards that target, so that at least you align the energies of the Trustees, the service providers and the member,” says Hanekom. “You have to be able to inform the member as to the Board of Trustees’ vision and ask whether or not they are on board.”
There is nothing wrong with the DC pension fund, but the way in which it has been applied leaves a lot to be desired. The industry needs to decrease costs, tackle inefficiencies and deliver a better retirement income to all its members or face National Treasury’s wrath.
Editor’s thoughts: National Treasury appears intent on a retirement industry comprising a handful of super umbrella funds (six is the number mentioned) backed up by an extremely efficient – and probably guaranteed – annuity solution. Until this solution is engineered it will be up to industry stakeholders to improve the fortunes of the country’s retirement savers. Would you agree that blindly following the pension fund rules could compromise a member’s retirement? Please add your comment below, or send it to [email protected]
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